Free delivery creates holiday boon for U.S. consumers at high cost

Fri Jan 2, 2015 12:21pm EST
 
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By Deepa Seetharaman and Nathan Layne

SAN FRANCISCO/CHICAGO (Reuters) - For top U.S. retailers, free delivery is now the norm. That is good news for shoppers, but not so much for investors.

During the just-ended holiday season, outlets from Target to Wal-Mart to Amazon expanded their free-delivery options, adding more items eligible for free shipping. They also did away with minimum spending thresholds to qualify for the perk.

Yet as more U.S. shoppers view free shipping as their right, retailers struggle to make a profit online. That struggle will become evident in coming weeks when companies report financial results for the holiday quarter, analysts said.

"For most companies, it is a very expensive proposition to try to offer fast and free," Steve Osburn, director of supply chain for consulting firm Kurt Salmon, said in an interview. "It's really eating away at the margin dollars at some of these retailers."

Shipping remains a key battleground in the escalating war between brick-and-mortar retailers and Amazon.com Inc, with both sides spending big on logistics. Offering free shipping has long been standard practice during the holidays, but in 2014, retailers leaned on it heavily all year long.

The number of online purchases in the United States with free delivery hit a high of 68 percent in the third quarter of 2014, according to industry-data tracker comScore, up from 44 percent the previous year. Amazon said this week that it saved customers $2 billion in shipping fees over the holidays.

Much of those savings came via Amazon's Prime program, which offers free shipping on most items for a $99 annual fee.

The company declined to share the previous year's figure. Nor would it share estimates on how much more Prime customers bought compared with others, which would provide some insight into how much Prime might boost Amazon's revenue. Forrester Research analyst Sucharita Mulpuru estimates that Amazon loses $1 billion to $2 billion a year on U.S. Prime shipments.   Continued...

 
A worker gathers items for delivery from the warehouse floor at Amazon's distribution center in Phoenix, Arizona November 22, 2013. REUTERS/Ralph D. Freso